Although it’s risky to take money from a fund set aside for retirement, the advantage of using pre-tax cash has led to people taking their 401(k) funds and investing them in their own businesses.

This option is available when someone leaves a job and can rollover a 401(k) plan into a new investment. They don’t have to be the business owner, but that’s often the case.

“That’s the case with 80 percent of my clients who have done this,” says Tim Jochim, chair of the Business Succession & ESOP Group at Kegler, Brown, Hill & Ritter. “They’re in the business with a larger company, they decided they didn’t want to work in the corporate bureaucracy anymore and they can do better than their existing employer. They developed their business plan, left to start their own company and this is how they funded it.”

Smart Business spoke with Jochim about what’s  involved in rolling over a 401(k) plan into a new or existing business.

How can you use your 401(k) plan to start or invest in a business?

When you terminate employment, you’re eligible for a distribution from your 401(k) plan. You do a direct rollover into the 401(k) plan, profit-sharing plan or employee stock ownership plan (ESOP) of your new company.

For example, an executive decides he wants to leave his job to start a new company and there are assets he wants to buy. He does a direct rollover of the $5 million in his 401(k) into the 401(k) of the new company. The trustee of the 401(k) plan is then directed to purchase $5 million of newly issued stock of the new company. Now the company has $5 million in cash, which it uses to buy the target business. In effect, he’s used his 401(k) plan from a prior employer to start his own business.

What are the tax advantages?

Pre-tax dollars are used to buy a business. That’s saving somewhere between 30 percent and 40 percent when you count federal, state and local income taxes. So instead of $5 million to buy this business, he would have had only $3 million because the other $2 million he would have paid in taxes.

Theoretically you could do it with any amount of money, but with the cost of documentation and the risk of compliance to make this pay, you really need a minimum of $1 million to work with in your 401(k) plan.

Why is setting up an ESOP the best option in most cases?

The company can be a C Corporation or an S Corporation. If it’s a C Corporation, the corporation pays taxes on its profits. If it’s an S Corporation, the owner pays the taxes on the profits, because it’s a pass-through entity. However, the individual is not the owner — the 401(k) is the owner and the 401(k) must pay the taxes. But if it’s an ESOP, those profits are exempt from federal and most state income taxes. That’s the advantage of an ESOP.

Can you set up an ESOP as an individual?

If your new company has other employees, they must be given the same opportunity to direct their assets into company stock. Usually that’s only a temporary window to get it started. The Employee Retirement Income Security Act (ERISA) prudence rules limit investment in sponsor company stock, and certain IRS rules require that the benefits, features and rights be nondiscriminatory. If the owner can do this, then you have to provide that opportunity to everyone else who is a participant in the 401(k) plan, subject to the prudence rules. Because of the prudence rules, employee elective deferrals are usually not invested in company stock.

Considering the tax advantages with ESOPs, why would you take another route with investing your 401(k) rollover?

If you have an S Corporation ESOP, there is an ESOP anti-abuse test — in order to pass, the company should have at least 10 employees because the test prohibits concentration of stock ownership in a few people. That is sometimes called the ‘Seinfeld rule.’ This is hearsay, but the story is that TV’s Seinfeld family had discovered this magic thing called S Corporation ESOPs. They had their own entertainment company and only a few family members who were shareholders. They set up an ESOP, sold all of their stock to the ESOP and were the only participants. So they got all of their stock back and didn’t have to pay any federal income taxes. There was an uproar in Congress about this type of transaction and the S Corporation Anti-Abuse Act was passed.

What risks are involved in having a 401(k) fund a business?

Under the ERISA prudence rules, qualified plans are supposed to be diversified. They are not supposed to be primarily invested in employer securities, such as their own company stock. Only an ESOP has statutory exemption from the diversification requirement. You can amend a profit-sharing plan or a 401(k) plan to allow that, but you’re taking a greater risk under pension law because they don’t have the statutory exemptions that ESOPs have. The risk is that, as a fiduciary of the plan, you’re acting imprudently by permitting investment exclusively or primarily in company stock, and therefore you’ve breached your fiduciary duty and are subject to sanctions from the U.S. Department of Labor.

Do you need to hire an attorney to fund a business with a 401(k) rollover?

There are consulting firms that sell this concept, but they don’t draft the documents, they just sell the concept. A client who did this a couple of years ago had a group that was going to charge $30,000 just for the concept and wasn’t actually going to do the work. The problem is finding qualified attorneys. There are only a handful nationally that do this well. It’s high benefit, but it’s also high risk.

Tim Jochim is chair of the Business Succession & ESOP Group at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5443 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

Borrowers often assume that because they have made all their payments in a timely manner, renewing their line of credit will be as easy as it has been in the past. However, this is not the case, says Kenneth R. Cookson, attorney with Kegler, Brown, Hill & Ritter.

“The lending environment is different now and the conditions that allowed some borrowers to run the lines up to the maximum amount and simply pay the interest have passed,” says Cookson. “While in earlier years, it was almost automatic that timely payment of the monthly interest alone would make renewal easy, today, being a ‘loyal customer’ is nearly irrelevant to the renewal process.”

Smart Business spoke with Cookson about the lending environment and how changing conditions have affected it.

What challenges are banks currently facing?

In the post-Great Recession regulatory environment, banks are facing a combination of focused regulations and declining values in real estate portfolios and borrowers. They have pressure on their capital requirements and reserve requirements. When a loan is classified as less than perfect, there has to be a reserve established from a bank’s capital to offset the portion of the loan that is in jeopardy, which can eat into capital reserves quickly.

Banks are being subjected to a loan-by-loan analysis by regulators and they are trying to get ahead of that by going through their own portfolios to figure out which loans are speculative and which are not.

Further, a bank may feel regulatory pressure when it has a high concentration of loans in one industry with similar borrowers, so it may hedge its risk. The borrower may be surprised that the line of credit is not extended because the business has made payments on time, but the bank may feel that it is too exposed in that particular area.

How are banks coping with these regulatory requirements?

They are certainly increasing their lending standards. The ratio of loan-to-value has come down, particularly in the real estate market, where a 70 percent loan-to-value ratio is not an unusual request. When you couple that with a decline in real estate values, it really amplifies the state of the conditions and the difficulties for both lenders and borrowers.

What is happening to borrowers?

Borrowers, in many cases, are being caught unaware. They have had a line of credit with a bank for many years and don’t deal with a commercial banker very often. They will send in financial statements annually, the revolver is generally renewed and the rate goes up or down according to market conditions.

Now, bankers are having trouble renewing those lines of credit and are reducing them, or imposing other requirements that have not been enforced previously, such as not allowing borrowers to take out the maximum on their line and just pay the interest for a full year. The borrowers express surprise, asking, ‘Why shouldn’t making timely payments make the renewal of that loan automatic?’

The answer begins with the regulatory requirements on banks and concentration issues, the value of the portfolio of the collateral supporting the loan, an increase in loan-to-value ratios and cash flows.

If it is a real estate loan or one backed by accounts receivable, and the value of either or both has gone down, leading to the appropriate ratios established in the loan document to not be in line, the loan could be classified downward. Borrowers need to understand a bank’s regulation reviews, internal reviews and lending policies, and be prepared for that.

What can borrowers do to help themselves through this?

Borrowers should make sure that their financial statements are current, accurate and complete. Look at your internal records and make sure that your accounts receivable are all good, and if they are not, work to discover the problems before the bank does.

Also, know your business plan and what your five or 10 largest customers are doing. If you learn that of your two lines of business, only one is profitable, you should shift your resources to the more profitable of the two.

Companies can get weighed down by the history of their operations and not take a critical look at their business model, business plan, customer array and pricing policies. Examine your business model as if you were starting fresh.

There is no shortage of examples of businesses that hypothetically have grown but their profits have not gone up proportionally. Increasing sales doesn’t necessarily mean higher profits because of other factors, such as margins and collectability issues. You have to scrub the numbers to see what you are doing right. You may have to cut back sales to better serve customers at higher margins in order to make more money.

How can banks and borrowers each adjust during this period of transition?

You have to assume that we are going to come out of this Great Recession and that the economy will be back in growth mode. This takes patience and understanding from both lenders and borrowers.

Lenders want to make loans. They need to lend money because that is how they get a return on the capital that has been invested. And borrowers need to be granted loans in order to make that happen.

Kenneth R. Cookson is an attorney at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5445 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

Women are playing an ever-increasing role in changing the economics of growth, growing businesses and jobs, and creating new opportunities for everyone. This is especially the case in economies that are slow or stagnant, where greater opportunity exists to start a business.

“Women are taking advantage of these opportunities in droves, and they’re able to grow businesses in times of slow economic changes,” says Stephanie Union, a partner and chair of Kegler, Brown, Hill & Ritter’s women-owned business area.

Many women have taken small mom-and-pop shops and grown them into successful small businesses.

“There’s a greater opportunity for women to do that today, whereas in past generations, there might not have been, and communities are benefitting from the number of jobs they create,” she says.

As women continue to progress in the professional world, mentorship programs, referrals and professional associations designed to support women business owners are increasingly important.

Smart Business spoke with Union about the unique opportunities women have today to give or receive advice that can help grow women-owned businesses.

How can women helping other women and referring business to each other be beneficial?

There’s recognition among certain successful women that you can pass on your success by referring your colleagues and friends to other female professionals. It’s amazing the number of referral groups, professional networks and organizations that provide many opportunities to get involved, a number of which encourage referrals among women. Having that camaraderie can help women succeed and gain ground in their own businesses.

There are also a number of certification programs for women-owned businesses that offer a leg up in terms of getting certain types of work from federal and state governments. For example, the Women’s Business Enterprise National Council will certify women-owned businesses, as does the Small Business Administration. The certification processes are rigorous, and companies have to prove that they are a woman-run business and that the majority of the company is controlled by a woman. The documentation and effort required to get certified is stringent, but that designation can be very beneficial for companies in certain industries.

How do the needs of women business owners differ from those of their male counterparts?

A number of women find themselves in industries traditionally dominated by their male counterparts, so finding their way among the men can be a challenge. Partnering with people who have insight into the industry can help them find comfort. Many women business owners have navigated the waters themselves and can help other women get established.

The needs of women business owners can sometimes be fulfilled more fully by fellow women. Women who are professionals generally have a better sense of what other women business owners are experiencing and what they have to face on a daily basis. That empathy can direct the way women do business together and help all of those businesses succeed and prosper.

How can women benefit from working with services that cater to women business owners?

Having ties with professional women’s groups can give someone perspective on the obstacles women deal with and how to support women going through those struggles. While the services aren’t different or better, they are provided in a way that women can appreciate more and respond to better.

There is something to be said for knowing the struggles women face and have faced. Taking these into account when giving advice can help women business owners succeed.

What issues are women business owners likely to face?

There have been historic struggles for women. While there are laws that allow women to vote or prevent discrimination, women still face struggles that are different from those that men face.

Maintaining a work/life balance is an issue for both men and women, but it’s hard when you’re a mother and working full time, considering there remain different societal demands for women than men. While conditions are changing, they haven’t fully equalized between the sexes, so daily struggles still exist. The goal is to recognize those struggles and support women by helping them find balance within the working world.

What can women do to help other women be successful professionals?

There are mentoring opportunities. Who better to understand the struggles of a woman than another woman? Some organizations and associations have mentorship programs, but, in my opinion, the best mentorships happen without much formality. It is better if the relationship develops naturally.

Natural mentorships are informal. It’s not a situation where you must meet with the woman you are mentoring four times per year and accomplish certain goals. Instead, it is a relationship that develops in which you care about the way the person you are mentoring is advancing and can offer her advice.

To be prepared to be a women business owner, you also need education. When starting your own business, there are a lot of things you need to know in terms of accounting issues and legal matters, including rules surrounding employees and hiring. You need to have a good education or surround yourself with people who have experience in those areas.

A number of women-focused associations or organizations can provide the support or connections needed to get a business up and running.

Stephanie Union is a partner and chair of Kegler, Brown, Hill & Ritter’s women-owned business area. Reach her at (614) 462-5487 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

The number of small businesses is increasing, and as owners focus on growing their companies, many are overlooking available tax incentives.

“Capital is so important to a growing company to facilitate growth and ensure stability,” says Jeremiah E. Thomas, an associate with Kegler, Brown, Hill & Ritter. “However, small business owners often get focused on running their business and miss out on opportunities to qualify for programs that can ease tax burdens and reduce capital restrictions.”

He says it’s important to know what’s available so that you can maximize your access to money for the benefit of your business.

Smart Business spoke with Thomas about how to uncover government programs that can help ease your company’s tax burden.

Are funds readily available to small businesses?

There are many programs and incentives available, but some can be hard to obtain. While businesses may have the impression that there are easily accessible grants available, many of them are designed for very specific purposes and the average startup likely wouldn’t qualify. However, that doesn’t mean there aren’t other opportunities to lower costs through tax credits and intelligent tax planning on the federal, state and local levels.

What types of tax incentives are available for a new business?

The most easily available tax incentives may be federal tax incentives because, in many instances, they are automatic. Knowing which federal incentives you qualify for and accounting for them on your annual tax return allows you to access ‘easy’ money.

For example, there is relief on capital gains taxes if you own qualified small business stock. There is also the ability to immediately deduct from taxable income certain expenses for starting a business, and small businesses are able to use tax credits for providing health care, energy efficiency improvements, and research and development expenditures.

In contrast, a lot of state and municipal tax programs require some negotiation, for instance, with county representatives to get an abatement for real estate taxes. These credits are valuable, but they take extra steps and costs to receive the benefits.

How are some tax incentives ‘automatic’?

Receiving the benefits of a tax credit can be as simple as knowing the credit exists, factually qualifying for it and checking the appropriate box on your return to get the benefit — there’s no application process.

Also, some of the existing tax software can help automatically identify tax benefits by asking questions to determine if you qualify. However, squeezing every benefit out of a particular tax incentive is more complicated than reading the form. Consulting with attorneys and accountants is a great way to identify the applicable credits, especially with more complex ones.

Are there other incentives that are more valuable or more easily accessed?

Well, there are certainly other programs. There are Small Business Administration loans, with which businesses can take advantage of lower rates to borrow capital to grow, but those programs are pretty complex and take time to apply and qualify for. At the state level, another more complex option is the Technology Investment Tax Credit Program, which provides investors with a tax credit for the money they invest in technology companies. Small companies advertise to investors the ability to get 25 percent of their investment back from the state in the form of a credit. But in order for it to benefit the company, they have to find an investor and understand the credit. Then the investor has to apply and the company has to qualify to receive the benefit, so there are many moving parts.

The state also provides some loan programs and tax credits based on job creation. The state may lay out a number of milestones during negotiation that a company must reach for it to receive a tax credit or qualify for low rate loans.

Are there options for more mature businesses?

On the federal level,  large and small companies can both benefit from good structural planning. However, there are certain federal tax incentives that are only available to small businesses, which can be outgrown.

At the state level, broadly speaking, it’s easier for a more mature business to take advantage of the tax programs that exist, as Ohio is more interested in backing companies that can create more jobs, while startup companies might only be looking to hire one or two employees and may need to rely on a narrower band of incentives, such as those focused on technology.

What is the key to finding incentives that work for your business?

The real key is thinking holistically. A business is subject to different taxes. The property you own is subject to real estate tax, but programs such as the Enterprise Zone Abatement Program allow municipalities to establish local development areas where qualified companies can locate and take advantage of real estate tax abatements. There are also a number of ways companies can minimize their sales tax responsibilities, such as Ohio’s research and development sales tax exemption.

It is important to think creatively about the sources of tax and have good advisers on the accounting and legal side to keep you apprised of changes in the law. You can also talk with your local development entities to uncover state and local incentives; these programs are great marketing tools for governments to show how successful small businesses are performing in their area.


Jeremiah E. Thomas is an associate with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5447 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

The U.S. government views export control laws and regulations as serving a critical function in safeguarding national security and promoting foreign policy interests of the U.S.

“The regulatory regimes have imposed very significant penalties on certain companies and individuals for export control violations, so given the nature of how trade is conducted, and the threat of terrorism, there definitely seems to be greater scrutiny by regulators,” says Aneezal Mohamed, of counsel with Kegler, Brown, Hill & Ritter.

Smart Business spoke with Mohamed about how to ensure you are complying with export control laws.

Why should a company be concerned about export control laws?

Penalties for noncompliance could be very severe and hinge on how pervasive the noncompliance and violations are, whether the exporter has self-reported violations, etc. Penalties could include seizure of export and import shipments, criminal and civil penalties, appointment of a special compliance officer, debarment from exporting and employment ramifications.

Who administers the export control laws and who is subject to it?

Several agencies are involved, including the Department of State Directorate of Defense Trade Controls (DDTC), which administers the International Traffic in Arms Regulations (ITAR) and the Arms Export Control Act that control items considered defense articles and services; the Department of Commerce Bureau of Industry and Security, which administers the Export Administration Regulations (EAR) that control dual use technologies; the Department of Energy; U.S. Customs and Border Protection; and the Bureau of Census.

Every ‘U.S. person’ must comply with export control laws and regulations. All U.S. individuals and companies, and green card holders are considered U.S. persons under these laws.

What type of registration is required under ITAR?

Under ITAR, if you manufacture or export defense articles, you have to register with the DDTC. The annual registration fee ranges from $2,250 to $2,750. Disclosures required by the registration statement are technical and detailed, so getting expert counsel to help would be in your best interest. If you’re exporting defense articles or services, you’ll need licensing and approval from the DDTC.

What is the meaning of ‘export?’

Exporting is not only transmitting something outside of the U.S. If someone who is not a U.S. citizen or a green card holder is employed in your U.S. office and views controlled information, you have exported that controlled information to that individual’s country of citizenship; it’s called a ‘deemed export,’ and it is a violation of export control laws.

Exporting also includes sending or taking defense articles outside the U.S.; transferring ownership or control to a foreign person; transferring or disclosing technical data to a foreign person inside or outside the U.S.; and performing a defense service for a foreign person inside or outside the U.S.

What defense articles and services are controlled under ITAR?

Defense articles are any article or service specifically designed, developed, configured, adopted or modified for a military application.

Defense service means furnishing training and assistance in the U.S., or outside the U.S., for the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of defense articles.

What articles and technical data are subject to ITAR and EAR regulations?

The U.S. Munitions List contains all defense articles subject to control under ITAR. There are 22 categories that are broadly interpreted by the DDTC. Technical data is information required for the design, development, production, manufacture, assembly, operation, repair, testing, maintenance or modification of defense articles, and software for defense articles.

EAR controls dual use items such as those with primarily commercial uses that also have military applications.

Is it critical to determine if an item is controlled under EAR or ITAR?

Yes. Making the right determination is critical because if you incorrectly classify your item as being controlled by EAR and it is actually an ITAR controlled item, then you face disclosure, penalty and other sanctions. In the reverse case, you have created unnecessary work and an administrative burden.

What steps need to be taken before exporting?

The significant steps are classifying items as ITAR or EAR controlled; verifying if a license is required to export your item to the target country; verifying that no prohibited end-users (countries, groups, individuals, etc.) are involved with the export transaction; verifying that no prohibited end uses (intended purposes) are involved with the export transaction; if a license is required, determining if there are exceptions; and if no exceptions are available for your transaction, filing for and obtaining the appropriate license before exporting.

Are export control laws complex?

Export control laws are complex, but that is why you hire experts. If done right, they offer significant benefits. If done wrong, the penalties for noncompliance could be costly for the company and for individuals. It is best not to have to defend yourself from charges of jeopardizing U.S. national security and foreign policy interests.

Aneezal H. Mohamed is Of Counsel with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5476 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

The crowdfunding component of The Jumpstart Our Business Startups Act (JOBS) is designed to help startup and emerging growth companies raise capital through new securities exemptions.

“It’s a promising platform for companies that are already doing small-dollar raises of capital,” says Jeff Roberts, a director at Kegler, Brown, Hill & Ritter. “With the high cost of capital from venture and angel funds and the general unavailability of bank funding, small businesses, startups and emerging growth companies are looking for different ways to raise funds, so they are very excited about the possibility of crowdfunding. It’s worth the hype because currently, raising capital is expensive and investors are hard to locate.”

Smart Business spoke with Roberts about how to benefit from crowdfunding.

What is crowdfunding?

Crowdfunding concepts have been in the market for quite some time with companies like Kickstarter providing a platform for businesses to raise money through donations. With the passage of the new JOBS Act, businesses will soon be permitted to issue equity to investors based upon a securities exemption that allows companies to raise up to $1 million annually from non-accredited, small-dollar investors such as friends and family, and those who want to place their money somewhere other than the stock market. Funds will be raised through regulated online crowdfunding intermediaries.

Investors will be limited in the amount of money they can invest. According to the JOBS Act, investors with an annual income or net worth of at least $100,000 can invest up to 10 percent of their annual income or net worth. Those with a net worth of less than $100,000 can invest the greater of $2,000 or up to 5 percent of their income or net worth. The dollar amounts at risk on the front side are small, which helps alleviate the fear of some skeptics who think some investors may spend their life’s savings on a fraudulent venture.

What kinds of companies should consider crowdfunding to raise capital?

Local restaurants (or other small businesses with dedicated customer followings) that need to make certain capital improvements can go out and raise the money for those projects through these online intermediaries. Any startup company that doesn’t generate a lot of income up front could also take advantage of the crowdfunding platform, though such companies may have more difficulty in generating a buzz.

The financial disclosure requirement for raising $100,000 or less is not as great as raising between $100,000 and $500,000. In the latter case, you have to provide reviewed financials, and in raising more than $500,000, companies have to provide audited financials. The cost of providing those financials has been a roadblock for some small startups. When their accounting bill can be $10,000 to $20,000 before they raise a dime, it can be prohibitive to their market access. Given the cost profile, companies with less than $100,000 in financial needs may be best served by this new platform.

What are the potential legal risks associated with crowdfunding?

Companies seeking to raise funds though this exemption need to be more concerned about compliance with state laws that govern corporations, limited liability companies and other entities because, given the relaxed federal regulation, greater emphasis will likely be placed on state law fiduciary duties.

If Ohio can come up with some sort of regulatory scheme that makes it efficient to raise capital this way, then it could become the Delaware of crowdfunding. A lot of the governmental bodies and politicians like that idea and are behind it, but it’s still early. And since federal regulations will trump state law, how this will be regulated between states is still up in the air.

What could change about crowdfunding regulations?

Crowdfunding won’t become a reality until the end of the year because the SEC has 270 days from the date of enactment to put its regulations in place. While some specifics are included in the JOBS Act, there are still some open questions and equity cannot be raised through the crowdfunding securities exception until the regulations are released. What worries me is that the SEC, in an attempt to hurry up and get something out there, might throw out proposed regulations that are not really well thought out, which may create additional road blocks that effectively eviscerate the purpose of the JOBS Act, which is to make it easier and cheaper to access money.

What can companies do now?

Put it on your radar as an opportunity. Some companies considering doing raises in the next six months are operating under the old SEC rules and might put off those investments until they can see what happens with crowdfunding. But otherwise, not much can be done until we know what that landscape looks like.

If a company is interested in crowdfunding, where should it start?

Seek out legal counsel because this is such an unknown area. Issuers of crowdfunding equity are going to have questions about which intermediary to use. Should they go through a licensed broker/dealer instead of a crowdfunding intermediary? How much money should they raise? What are they going to have to provide in the way of financial disclosures? Hopefully, as the market develops, the process will become more efficient and well defined and the cost of fundraising will decrease.

The ability to go to nonaccredited investors online and the ability to reduce transaction costs by not expending substantial amounts of money on securities compliance is a step in the right direction, but time will tell how successfully crowdfunding can be implemented and what type of demand it generate.


Jeff Roberts is a director with Kegler, Brown, Hill & Ritter Co., L.P.A. Reach him at (614) 462-5465 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus
Tuesday, 01 May 2012 17:00

How to prepare to sell your company

Selling your business will be one of the biggest transactions of your life.

“The first thing you need to ask yourself is, ‘Is this really what I want to do?’” says Eric Duffee, an associate with Kegler, Brown, Hill & Ritter. “There may be other options, such as selling the business to your employees or keeping the business in the family.”

However, if you are going to seek an outside buyer, realize there is a tremendous amount of effort involved. “Selling your business is like having two full-time jobs,” Duffee continues. “You have the job of running your business, plus the job of getting it ready to sell — and then dealing with the onslaught of prospective buyers.”

Duffee emphasizes that it’s important to work with experienced advisers as you prepare to sell the business and move through the process. “They will help you understand what matters and what doesn’t. They’ll show you where you have negotiating power and where you don’t.”

Smart Business asked Duffee what owners should do to lay a solid foundation for the sale.

How can the owner determine exactly what it is he or she is selling?

This seems like it would be an easy thing to do, but it’s not. Some owners tend to look at their business through rose-colored glasses, overestimating its value. On the other hand, there are owners of service businesses who think that once they leave, there will be nothing left behind; however, that’s not always the case. You have to put yourself in the buyer’s shoes. What are they getting in terms of value? Maybe it’s processes you use or an idea you have. Conversely, maybe you’re doing the same thing that many other companies are doing, but you have great contacts. You can sometimes leverage the value of those relationships and sell that value to the buyer.

How should the owner go about getting his or her financial house in order?

Obviously, it’s better to sell while your company is showing an upward trend. Generally, a business gets sold using an EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) formula. Any deviance on a balance sheet will cost you on a magnified level. For example, if a deal is priced at five times EBITDA and the buyer finds a $100,000 deviation, $500,000 gets taken off the sale price. So make sure your financial statements are accurate. As for the financial presentation, know that buyers have high expectations. They want to see an apples-to-apples comparison. The buyer wants to know your statements follow Generally Accepted Accounting Principles (GAAP). Do you need an audit? Maybe. But at least have an accountant look at your records from a disinterested, third-party perspective so that the buyer can translate what they’re seeing.

How do you go about locking down the value of intangible assets?

Intangible assets include things such as confidentiality agreements, non-competes, invention agreements and registered intellectual property. This is becoming an increasingly important issue, and we see this often in Ohio with the growth in the technology sector. Sometimes you’re selling know-how, ideas and concepts. How do you transfer that knowledge to the buyer? Does it make sense to get copyrights and patents? This is a cost, but sometimes you need to have something tangible and protectable to transfer. At the very least you should have confidentiality agreements in place. If you have a few key employees in your business who hold a great deal of knowledge, consider implementing non-competes and confidentiality agreements before the sales process.

What are some potential ‘warts’ to look out for early on?

There is no such thing as a perfectly clean business. If you know that a situation exists, have an open and honest talk with counsel. Don’t hide anything. Buyers will do due diligence and if they find something you haven’t disclosed, you’ll lose credibility; they may even claim you’re trying to defraud them. It’s better to be up front going into the deal. As a seller, your greatest leverage is at the outset. You don’t want the buyer trying to reduce the selling price deep into the process just because they uncover something that you didn’t tell them about.

How can you be sure you’re getting the best deal — both price and terms?

Be sure to work with a team of experienced professionals — accountants, lawyers, maybe an investment banker or a broker. To find potential buyers, you have to go through people who know people, and that usually means working with a broker or investment banker. The right broker will help you find qualified buyers and will operate confidentially, so as not to negatively impact relationships with your employees, customers and suppliers. In any case, you want as many potential buyers as possible; a competitive situation will help you get the best deal.

ERIC DUFFEE is an associate with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5433 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

Employment-related claims continue to rise. High unemployment rates fuel the fire. There are steps you can take, however, to keep any potential legal costs under control.

“Ben Franklin’s famous saying, ‘An ounce of prevention is worth a pound of cure’ really applies here,” says Jeffrey C. Miller, a director with Kegler, Brown, Hill & Ritter. “In addition, you want to have good communication with your employees and show them respect.”

Miller also stresses how important it is to “know” your employees. “Employers lose 75 percent of negligent hiring cases, so be sure to perform pre-hiring background checks. In the case of mergers and acquisitions, identify key employees you want to keep. Make sure they have agreements in place, and have counsel review the documents to ensure they are valid and enforceable, especially any noncompete provisions.”

Even when you do have all your ducks in a row, problems can still arise.

Smart Business asked Miller how companies can rise to those challenges without breaking the bank.

What issues must employers be especially mindful of right now?

First, despite reductions in many other line items, the budget for the U.S. Department of Labor (DOL) — Wage and Hour Division has been increasing on an annual basis. The two areas of major focus are 1) the investigation and enforcement of overtime and 2) employee versus independent contractor status, so be sure you are in compliance in those areas. Next, have measures in place to protect against retaliation claims, which — according to the Equal Employment Opportunity Commission (EEOC) — have risen every year since 1997 and now account for nearly 40 percent of all charges. Finally, be aware of the expanded regulatory definitions of the Americans with Disabilities Amendments Act (ADAAA) that went into effect in March 2011.

How can a company establish a solid foundation to protect against claims?

An employee handbook may or may not be necessary, but at the least have an effective Unlawful Discrimination and Retaliation Policy. Regardless of your company’s size, make it a compulsory company policy to document everything that happens, along with the disciplinary measures taken, even if they were only verbal warnings. Plaintiffs’ attorneys love taking undocumented cases to juries, so have everything in writing.

What are the first steps to take if a dispute arises?

Handle the situation with business efficiency — if you receive notice of a claim, contact counsel and your insurance company immediately. Do not change or destroy any documents, e-mails, or other electronically stored information, and make sure that your computer system is not set to automatically delete at specific times.

Designate one person to serve as a point person to work with counsel. You want to make the time spent with counsel productive, so having one designated person to handle this task will help avoid overlap and unnecessary fees. The point person should go into the first meeting with counsel with the confidential personnel file. He or she should provide a written narrative for the attorney that includes a chronology of events/facts. It should include the employee’s date of hire; salary history; any promotions, demotions, or disciplinary actions; and the names and titles of any supervisors or other employees who are involved in the current dispute. In a dispute involving a demotion, discipline, or termination, provide narrative examples of other similar employees who were treated in the same manner. Identify whether the complaining employee filed or participated in any grievances or disputes.

What happens after counsel has the facts?

Once counsel has all the dates, facts and information, he or she will develop a critical analysis and a strategy. Even though you may have significant HR experience, do not try to do these things yourself. Your attorney has seen a variety of cases and will be able to make a good evaluation of where you should go from here.

During this stage, you should feel free to talk through your strategy, but don’t ‘fall in love with it.’ Don’t be too rigid, because counsel might uncover further information as the case moves forward.

How can a company make the most of their time with the attorney?

In addition to having all the facts in writing for the attorney at the first meeting, maximize future time by scheduling formal follow-up meetings to cover multiple issues. Save up the e-mail and phone call questions and instead have a comprehensive discussion during the next meeting.

When should settlement be considered?

No matter how much you think there is no case, you almost always should consider settlement. You can arrange for Equal Employment Opportunity Commission (EEOC) mediation rather quickly and it is free and fairly effective. EEOC attorneys will tell you that 90 to 95 percent of cases that are filed have no merit and are due to hurt feelings — that is why it is so important to treat your employees with respect and keep the lines of communication open. Sometimes the settlement is as simple as an apology, an acknowledgment of some sort, an agreement to send management for training, or something similar. If you do reach a settlement, do not let your attorney leave without some type of signed agreement. A full and final document can be drafted later.

JEFFREY C. MILLER, a director with Kegler, Brown, Hill & Ritter, focuses his practice on management interests in labor and employment matters. Reach him at (216) 586-6650 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

The American Recovery and Reinvestment Act of 2009 (ARRA), also known as the stimulus bill, contains the HITECH Act that amends the Health Insurance Portability and Accountability Act (HIPAA), which was enacted in 1996.

“When HIPAA was first enacted, the health care industry was paper driven,” says Jeff Porter, a director with Kegler, Brown, Hill & Ritter. “HITECH is addressing some long-standing issues with HIPAA, as well as some newer issues that have arisen as a result of the advent of electronic health records and the online transfer of health information.”

Among the significant changes are the expansion of enforcement to states’ attorneys general and expansion of privacy and security provisions related to “business associates” and new breach notification provisions. In addition, penalties can now be imposed on individuals as well as entities.

Smart Business asked Porter for more information about the changes to HIPAA.

Who is covered by HIPAA?

You or a legal representative can determine whether you are a covered entity. The website for the U.S. Department of Health & Human Services ( and the Office of Civil Rights (OCR) provide good guidance in this regard. Covered entities typically include hospitals, nursing homes, medical offices that provide treatment and bill for those services, health insurance plans, and health care clearinghouses (e.g., companies that convert health records and other information into the coding necessary for billing and research). If you are a business associate of a covered entity (e.g., a medical billing firm or a home health care agency), and you are obtaining information for a purpose the covered entity might use it for, you fall under the HIPAA provisions which apply to business associates.

What changes have been made regarding penalties for noncompliance?

The penalties have changed in a couple of significant ways. First, in regard to enforcement, previously penalties could only be imposed on covered entities – now penalties can be imposed on individuals as well. If someone within an organization willingly neglects and doesn’t comply with the rules and makes wrongful disclosures, he or she will be subject to fines, as well as possible imprisonment. Second, in the past, enforcement and violations were addressed solely at the federal level by the Office of Civil Rights. Now, attorney generals are empowered to deal with enforcement and violations as well.

What is the impact on state privacy laws?

Although many believe that HIPAA is the sole controlling authority related to patient privacy, it does not however preempt state privacy laws and regulations. If provisions in the state privacy laws are more restrictive, then those provisions apply in addition to HIPAA. For example, Ohio has some of the stricter state privacy laws in regard to disclosure of protected health information. These laws have to be evaluated and reviewed to determine what additional actions might be needed in terms of notification and disclosures. The question for the future is whether states with these stricter privacy measures will impact exchange of health information with other states. In coming years, if we are going to have more free-flowing medical information, these issues will need to be addressed.

What is considered protected health information?

Protected health information is identifiable information related to treatment of a patient and that is maintained by a covered entity. In certain circumstances covered entities can release this information without authorization, for purposes of treatment, billing and health care operations. Covered entities can’t release information beyond those purposes without authorization of the patient. In addition, specific types of information are viewed as more sensitive (e.g., mental health and substance abuse information, information about certain diseases, such as HIV) in many states and more restrictions on disclosure exist at the state level.

What is a permissible disclosure?

Information can be disclosed if a patient authorizes it. Information must be disclosed by a protected entity if the HHS requests that information as part of an investigation. Permitted disclosures also include treatment information (to help treat a patient); information used to seek payment; or information used in the health care operations category if that information will improve the quality of care overall or part of the business overall.

Do patients have any new rights?

Patients will have a greater ability to try to find out who has accessed their protected health information. Past experience is that most patients never request such information. However, there will now be a greater ability for patients to request an accounting of disclosures. This means that covered entities and business associates could be asked to account for a good deal of information if they get a request. New regulations are being considered in this area, so it is an area to watch.

How can covered entities best keep up with the changes and protect themselves?

1) Keep an eye on releases from HSS about changes. 2) Consult with your legal representative. 3) Make sure your designated privacy officer is properly trained and that he or she is training your employees. 4) Keep open lines of communication with business associates and make sure any contracts you have with them include appropriate provisions that will require they comply with HIPAA and all other state laws which may come into play.

JEFF PORTER is a director with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5418 or

Published in Columbus

Over the last year, the National Labor Relations Board (NLRB) has issued a number of rulings pertaining to employee use of social media. These rulings impact how employers can word and enforce their social media policies.

“The NLRB has ruled that online employee comments and conversations — regardless of whether the employees are union or nonunion — are ‘protected concerted activity,’ similar to coworkers chatting around a water cooler, so long as they are more than ‘personal attacks’ against a specific person,” says Brendan Feheley, a labor attorney at Kegler, Brown, Hill & Ritter.

Feheley adds that while an employer can’t control every move its employees make online, employers do need to monitor content and be conscious about what employees are saying in order to protect their brands. At the same time, the employer needs to be careful not to violate employee rights or take actions that could be found to be discriminatory in nature.

Smart Business asked Feheley how companies should evaluate their existing social media policies.

What are some of the key areas where a company needs to protect itself?

The protection of trade secrets is very important. You have to be very careful about the types of recommendations employees give; they can’t endorse products without disclosing themselves as employees, and certain statements can constitute SEC violations. There is also a huge brand protection issue. Social media is the way Gen Xers and Millennials get their information, buy things and make decisions. You want to be sure your company is seen in a favorable light. Companies also need to be careful about how they approach their employees’ personal use of Facebook. You may want to mention in your social media policy that you may periodically monitor employees’ Facebook activity. If they are aware of this, perhaps they will take steps to protect their profile, which basically is a protection for both the employee and your company. Companies should be careful about running Facebook searches on job applicants. Wait until the initial round of in-person interviews has taken place to help protect your company against claims of discrimination based on a Facebook profile.

How can a company determine if its existing social media policy is strong enough?

Pay attention to what is going on in your specific workplace. Do you have problems? Are you seeing negative Facebook posts? Do you see instant messages going through Facebook? If so, is that causing a major problem with productivity? If you’re experiencing problems, change the policy to address them.

How can a company avoid infringing on employee rights?

Be in touch with how the courts are interpreting social media cases. Your policy cannot be overly broad. Put language in the policy that states that nothing is intended to violate state, federal, or NLRB laws. Be cautious any time you discipline an employee for something he or she does online. Discipline can mean many things — a written warning, a schedule change. It’s fine to talk with the employee; make sure they’re aware of what you want them to do. But be careful about disciplining them.

Does a company need a separate policy for every social media outlet out there?

Probably not. An alternative is to list each outlet and provide general guidelines for each. It’s also prudent to explain what types of information you monitor, save and may possibly read (e.g., instant messages and e-mails). Another thing to be aware of is the high risk that today’s camera phones pose. These devices make it very simple for employees to take pictures or videos of client lists and other confidential documents. You may want to consider adding wording to your policy that tells employees that if they use a smart phone at work — regardless of whether they own it or you own it — that you reserve the right to monitor the data and pictures stored in the device (similar to the way you might reserve the right to search an employee’s purse or bag).

How can a company best implement its policy?

Train your managers the best you can. There is a very fine line between Big Brother and the reasons behind the policy. Make sure your managers know you are monitoring the messages they give to employees about what employees can and cannot do. Managers shouldn’t be using the policy to threaten employees — but rather they should be promoting the policy as a tool that will protect everyone at the company. The policy should not be a sword, but a shield.

Who should be responsible for the social media policy and how often should they revisit it?

A committee should be responsible; it should be composed of a mix of employees including representatives from IT, HR and marketing. The policy will only be as good as its enforcement. Due to the rapidly changing nature of social media, the committee should meet once every two to six weeks — or at least once per quarter — to discuss developments. The IT folks might address how much time employees are spending online, the HR staff might bring specific online postings to the committee’s attention, etc. This is not the committee members’ regular job, so be sure the meetings are on the schedule so the discussions can take place.

BRENDAN FEHELEY, associate at Kegler, Brown, Hill & Ritter, specializes in labor and employee relations. Reach him at (614) 462-5482 or

Published in Columbus